The Court of Appeal of Alberta recently re-affirmed the need for carefully drafted pleadings and a thorough application record at a certification application, particularly where class-wide causation and class-wide damages are sought to be certified as common issues. In Andriuk v Merrill Lynch Canada Inc, 2014 ABCA 177, affirming Andriuk v Merrill Lynch Canada Inc, 2013 ABQB 422, the Court confirmed the denial of a certification application where the applicants failed to meet nearly every requirement for certification set out in the Class Proceedings Act. However, of most importance were the Court’s comments on the necessity of proving at the certification stage a workable methodology for later proving causation and calculating class-wide damages.
Here, the plaintiffs alleged that Merrill Lynch had caused losses to the proposed class by buying too large a position in a single, thinly-traded junior stock. The plaintiffs’ theory of loss was that Merril Lynch could not offload any position in the stock without negatively impacting all holders of the stock. The plaintiffs asserted class-wide loss. They alleged in particular that Merrill Lynch’s strategy artificially and negatively reduced the value of the share price for all shareholders. They alleged that everyone who held the shares suffered a loss in value during the class period.
As the Chambers Judge noted, this caused some difficulty. Any shareholder who suffered a loss and crystallized it would need to show which part of the loss was attributable to Merrill Lynch’s actions, as opposed to other market forces. Similarly, any investors who sold the shares at a profit during the period would have to establish that, but for Merrill Lynch’s actions, the profit would have been greater. The Chambers Judge noted that there would be challenges in proving causation. Further, the plaintiffs did not show that any methodology existed to prove either the reduction in share value or that any such reduction was caused by the alleged breaches of Merrill Lynch. The plaintiffs had no expert evidence on the issue, and only relied on an admission in cross-examination from a defence witness in response to a hypothetical question, in which the witness admitted that Merrill Lynch selling off shares could conceivably negatively impact the share price.
The Chambers Judge noted that while the plaintiffs’ failure to adduce evidence of a methodology for establishing causation and class-wide damages was not fatal to finding a cause of action (which is a pleadings based test), the absence of any such evidence raised insurmountable obstacles to certification of common questions of loss and causation and whether there could be a claim for aggregate damages.
The Chambers Judge held that where questions relating to causation or damages are proposed as common issues, there must be evidence to support the plaintiff’s contention that there is a workable methodology for determining any such issues on a class-wide basis. Because the proposed theory of loss was novel, and because the plaintiffs proposed common issues for both causation and damages, the plaintiffs were required to show that they could possibly meet the burden to prove loss apart from other market forces and to link such loss with each of Merrill Lynch’s impugned actions. The Chambers Judge had grave doubts that the necessary proof could ever be proffered. The Chambers Judge also doubted that it would be wise to wait until after discoveries had been completed to determine this threshold issue. She noted that it would not promote efficiency or judicial economy to permit certification when there was simply no basis in fact to show that the common issue of class-wide loss could ever be proved. Further, there was no possible way on the record before her to determine that the court could offer an aggregate award of damages. She found that the statutory requirements for issuing an aggregate award of damages in section 30 of the Class Proceedings Act could not be met on the record before her, because the causes of action related to the common issues had not been articulated, and thus she could not determine (as required by the test for awarding aggregate damages) that no questions of fact or law other than an assessment of monetary relief would be left after the resolution of the common issues trial. Also, because there was no methodology proposed, she could not determine whether damages could possibly be calculated on an aggregate basis, as opposed to an individual basis.
The Court of Appeal upheld the dismissal of the certification application. In particular, with respect to the issue of whether the plaintiff had to put forth a methodology for proving damages, the Court of Appeal relied on two cases: Chadha v Bayer Inc, 2003 63, OR (3d) 22 (CA) and Pro-Sys Consultants Ltd v Microsoft Corp, 2013 SCC 57,  3SCR 477. While Pro-Sys and Chadha are price-fixing cases, the comments of the Supreme Court of Canada in Pro-Sys are more broadly applicable (as the Court of Appeal has now held). In Pro-Sys, the Supreme Court of Canada held that there must be some proof of a methodology capable of establishing an actual loss to the class. The Supreme Court of Canada noted that this would typically involve expert evidence, must be sufficiently credible or possible to establish some basis in fact for the commonality requirement, and that the methodology must offer a realistic prospect of establishing loss on a class-wide basis. There also had to be some evidence of the availability of the data to which the proposed methodology is to be applied.
Here, the Alberta Court of Appeal applied the framework suggested in Pro-Sys, despite this not being a price-fixing case. Although the certification threshold is low, courts will serve a “gatekeeper” function to prevent class proceedings from moving ahead where there is no workable methodology put forward for determining causation and loss. To allow otherwise would be to potentially certify class proceedings where, in fact, damages could never be established. That would defeat the very purpose for which class proceedings legislation has been passed, namely efficiency and judicial economy.
For those seeking to certify class proceedings, the importance of putting forward credible evidence of a methodology for proving causation and damages cannot be overstated. By contrast, for those seeking to dispute certification, challenging the proposed methodology, the lack of any such methodology, or the sufficiency of the evidence upon which the proposed methodology is based, are all likely to prove to be fruitful and worthwhile avenues of pursuit.